Egypt’s FX Woes Morph Into MSCI Headache

While high-fives were being doled out in the United Arab Emirates and Qatar on Wednesday after MSCI Inc. bumped both up to emerging market status, stocks in Cairo slumped after the index compiler warned that Egypt might lose the same coveted status.

In its 2013 annual market classification review, MSCI noted that a lack of foreign currency in Egypt, where reserve levels have tumbled to $16 billion from $36 billion before the uprising two years ago, is making international institutional investors fret.

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Trading on Egypt’s stock market remains volatile

“MSCI may be forced to launch a public consultation with the investment community on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation on the Egyptian foreign exchange market to worsen and result in the inability of international investors to repatriate their funds,” it said.

The MSCI threat was enough to send Egypt’s EGX 30 Index into a tailspin. The gauge plunged 5.2% on Wednesday, taking its year-to-date losses to around 16%.

Ahmed Abu El Saad, managing director at Rasmala Egypt Asset Management, said he was part of a team that originally held discussions with MSCI about joining more than 10 years ago. The concerns raised by MSCI overnight are ones that can be resolved by Egyptian authorities, he said.

“This is ruining 15 years of work in the Egyptian capital market and it is a huge step back for Egypt,” Mr. El Saad said. His firm manages local assets worth 4 billion Egyptian pounds.

Egypt remains in dire need of a confidence boost. The government is short of funds and has been negotiating with the International Monetary Fund over a $4.8 billion loan, which analysts and investors say is critical for the country. IMF officials left Cairo in April without agreeing on the terms of the loan.

The scarcity of foreign currency has forced central bank officials to limit the amount of dollars that local banks distribute. It has also made international investors wanting to exit the stock market wait up to six weeks to repatriate funds, according to some economists.

“Egypt is still a deep and well functioning market, but its recent volatility is not something the long only passive community can stomach,” said Daniel Broby, chief investment officer at London-based investment firm Silk Invest. “With memories of the month long suspension of the market due to the revolution still fresh in their minds, it is not a move that surprises me.”

According to MSCI, the lack of foreign currency in local markets could have a negative impact on stock market liquidity, another potential trigger for a downgrade to frontier market status due to the lack of liquid investable stocks.

Over the past few years, Egypt’s stock market has lost some of its most high profile companies. National Societe Generale Bank, Egypt’s second-largest private bank, was acquired by Qatar National Bank in December, while Egypt’s biggest listed company Orascom Construction Industries is in the process of converting its remaining shares in Egypt to OCI N.V., its Dutch parent company that trades on NYSE Euronext in Amsterdam.

“You have nothing at the moment to attract new investors, only old investors may find the current prices cheap and be encouraged to invest,” said Taymour El Derini, director of trading at Naeem Holding for Investments.